From what I hear, when governments need more money than the one in circulation, they just simply print more! That’s right; they just print more money and hope everyone is happy. It’s a different story when you and I do not have money. When you are short of cash, you simply have to work harder to earn it. That is, selling something – goods or services – so that those who have money, including governments, can transfer some of theirs to you, hopefully in a fair exchange. Minting Naira or the dollar is outside your purview.
The question then is, “how is Internet money or cryptocurrency produced to make it available for circulation?” Or, how is cryptocurrency minted or manufactured? For regular currencies, such as the dollar or Naira, the concept of manufacturing them is quite easy to grasp. That is, some man-made machines are used to produce the special papers or coins we know as money. For cryptocurrency, manufacturing them does not involve any physical machines. Moreover, these currencies do not exist in a physical form; meaning that you cannot touch them. They are also not computer files that you can save on your hard-drive. So, how are they manufactured to get them into circulation in the first place? Let us illustrate using bitcoin as an example.
The idea of how much money there is in circulation is relevant. For the dollar, according the US government Federal Reserve website, there was approximately $1.54 trillion in circulation as of April 5, 2017, of which $1.49 trillion was in Federal Reserve notes. For the Naira, an August 2015 published data states that at the end of July 2015, there were 1.574 trillion Naira in circulation. As stated above, governments seem to be at liberty to make more money available in circulation by printing more.
What about the bitcoins in circulation? As of 6 February 2016, 15.2 million bitcoins were reportedly in circulation, out of a capped total of 21 million. Realizing that there were approximately one thousand dollars in a bitcoin as of two weeks ago, the capped amount will need to go up if more people adopt bitcoin. Currently there are 25 new bitcoins produced (mined) every 10 minutes.
So, how were the 15.2 million bitcoins minted? While you and I may not be able to mint bitcoins, we can at least buy, earn, or spend them. That is, we can transact in them. Simply put, the bitcoin mining process is associated with the way that the transactions we make are recorded! The analog to governments in bitcoin production is the miners – they mine bitcoins during the course of confirming that the most current bitcoin transaction is legitimate.
Bitcoin dealers are sending bitcoins to each other over the bitcoin network all the time, but someone needs to keep track of who had paid or sent what. The bitcoin network has the responsibility of collecting the transactions made by all bitcoin dealers (during a given interval of time) into a list, called a block. Miners compete to authenticate the transaction in the most recent block and write them into a general ledger, which is a long list of blocks (or individual transactions). The general ledger is also called the “blockchain,” or the chain of the blocks, if you may.
Of course, the general ledger has to have integrity, which is where the miners come in. When a block of transactions is created, miners authenticate it. They do this by applying some mathematical formula to the data and turn it into something else – that is shorter; perhaps a random combination of characters (letters) and numbers. This end result, which is called a “hash,” is stored along with the block, which at the time is the most recent one (block) in the blockchain. The mathematical manipulation required to obtain a hash (for the current block) is conceptually similar to encrypting the information in a block. With this analogy, the miner takes the information in a block, assumed arranged in a one-dimensional array, and pre-multiplies this array by a two-dimensional (2D) array. To make the mathematics more difficult, the pre-multiplier is made to depend recursively on the various pre-multipliers for all the previous blocks in the entire blockchain.
In short, miners complete in time to generate an acceptable hash once a transaction is posted. The miner that first generates an acceptable hash – based on some metrics of course – gets a reward of 25 bitcoins, at which point the blockchain can be updated and everyone in the bitcoin network is notified. Thus, if there are no transactions, there will not be mining. Getting a hash becomes increasingly more difficult, enhancing the chances that the maximum allowable bitcoin in the system is not quickly reached. In principle, anyone can be a miner, but obviously you have to have the mathematics and programming skills to be able to hash a transaction block.
